Commonwealth Bank of Australia (CBA) Earnings Call Transcript & Summary

Hello, and welcome to the Commonwealth Bank of Australia's results briefing for the year ended 30 June 2020. I'm Melanie Kirk, and I'm Head of Investor Relations. Thank you for joining us. For this briefing, we will have a presentation from our CEO, Matt Comyn, with an update on the business and an overview of the results. Our CFO, Alan Docherty, will provide details of the financials, and Matt will provide an outlook and summary. The presentations will be followed by the opportunity for analysts and investors to ask questions. I'll now hand over to Matt. Thank you, Matt.

Thanks very much, Mel, and good morning, everybody. Before I start, I just wanted to acknowledge what a challenging 6 months it's been for Australians right around the country, starting the year with bushfires, but of course, more recently, the coronavirus pandemic and particularly want to pass on our best wishes to our customers, to our people and, of course, the broader community in Victoria. During that period, we've been doing our best to make sure that we're working hard to support our customers and making sure that we're continuing to consistently execute our strategy and deliver balanced outcomes across a range of different settings. We feel that we've made very good progress during that period. I'm just going to step through some of those highlights now. We've responded very quickly as we've needed to and put substantial support in place for our customers. We've responded to almost 1 million different requests for assistance over the last few months. That's enabled us to put in place substantial support, particularly around repayment deferrals, where we've deferred almost 250,000 repayments. We've also made 250 million personalized support messages through our CommBank app. We've also made sure that during that period of time, we've continued to support our customers with $100 billion of home lending and $27 billion of new business lending over that time. Pleasingly, we're seeing big increases in our employee engagement, up 13 percentage points to 81%. And I also want to just thank all of the Commonwealth Bank staff for their amazing support and hard work during that period to support our customers. That has enabled us to perform well across a range of different settings and for our shareholders. Our final year -- full year dividend of $0.98 in the second half represents 49.95% of statutory profit, which is reflective of APRA's expectations. As part of supporting our customers, we've been able to leverage the technology and digital investments we've been making for many years. In particular, we've seen more than 5.5 million visits to our CommBank app and NetBank, particularly to our information pages where we've made sure we've had up-to-date federal and state guidance and some practical information for our customers. In responding to supporting our business or SME customers, we've leveraged existing investments in our BizExpress technology and decisioning to process just over 50% of the SME loan guarantee schemes, helping our customers ensure that they could make their payments to their employees and participate in the JobKeeper scheme. Pleasingly, we've seen those investments in technology like BizExpress where now, for eligible customers, we can move from application, decisioning, online acceptance and funding directly into the customer's transaction account in under 20 minutes. And as part of looking to provide real value to our retail customers via our CommBank app, we've continued to extend our Benefits finder capability where we've seen a 78% increase in the last 6 months in terms of benefits. That's meant that more than $150 million has been delivered to our customers since we launched the Benefits finder functionality. Now just touching very briefly on the result. Our statutory profit was up 12%. It's the basis on which the dividend calculation was made. And the majority of that improvement or increase year-on-year is as a result of the divestments, predominantly the asset management divestment. Our cash net profit after tax was down 11%. And our Common Equity Tier 1 finished at 11.6%, which is approximately a $5 billion surplus above APRA's unquestionably strong 10.5%. Our full year dividend for the year of $2.98 is fully franked and, again, consistent with APRA's expectations. Over the full year, our cash NPAT we saw income up 0.8% from strong volume growth, which I'll unpack a little on subsequent slides. Our operating expenses up 0.7% for the full year or 0.4% sequentially. We saw our loan impairment expense up 33 basis points, which is predominantly driven by that $1.5 billion forward-looking adjustment that we took in our third quarter. And as I said, our cash profit down 11% for the year. We've seen that core franchise strength really come through clearly over the course of this financial year. In particular, we continue to focus very closely on our customers and watch the results of that through our Net Promoter Scores, which, pleasingly, we've seen some improvements throughout the course of the year. Right across all of our businesses, and again, in our digital banking solution, we finished with the highest ever Net Promoter Score, which is, of course, critical to our long-term strategy. Our operational execution, I think, can be highlighted in a couple of particular areas. Obviously, areas like BizExpress, which I've touched on, but also just the commitment and dedication to making sure we've kept very consistent home loan decisioning times during the course of the year has enabled us to again deliver a very strong home lending result at 1.3x system. That business lending result of $7 billion, up 5.1% for the year. And we actually saw the strongest growth in that fourth quarter that we've seen for the last couple of years. And in particular, one of the standout performances right across the business has been our deposit growth and, in particular, our transaction deposit growth, where we've seen a $25 billion and 25% increase in household deposits. Just spending a moment on deposit growth more broadly. We have seen total deposit growth over the course of the year of $64 billion. That's the most growth that we've ever seen by dollar value. And when we break that down again into particularly valuable deposits of transaction balances, we've seen $45 billion of growth over the year and $30 billion of that coming in the second half, which has really been a phenomenal result right across all of our business units. As we look at our balance sheet, we've continued to strengthen what we're already very well positioned, and we feel like we've got overall now the strongest balance sheet we've ever had. A couple of ways that's reflected, in particular, is through that deposit funding, which I mentioned. We saw a 5 percentage point increase during the course of the year, up to 74% deposit funded. And as you can see, set aside the GFC, there's an increase of almost 20 percentage points during that period. The forward-looking adjustment that we took in the third quarter sees us with a total provision coverage of $6.4 billion or 1.7% as a function of credit risk-weighted assets, which is still peer leading. And again, that Common Equity Tier 1 of 11.6% is a very strong outcome. And we also see another, between 58 and 68 basis points of capital to be generated inorganically from previously announced divestments, which have not yet completed. We -- the next few slides have really tried to break down and provide some additional disclosure around repayment deferrals given the understandable interest in this area. We've developed some technology to make it easier both to analyze and understand what's going on, but of course, to ensure that it's an efficient process for customers opting into the repayment deferral process as well as opting out. And you'll see the disclosure here that we've provided. We've seen quite a reduction in customers coming out of their repayment deferrals, even though in the context of home lending and business lending, they are entitled to the full 6-month repayment deferral. Pleasingly, from a personal loan perspective, almost 95% of customers have recommenced their repayments. We've also made that opt out process an easy one from a customer perspective on NetBank and the CommBank app. And we've also made it easier for customers to look at interest-only as an option. I think unlike other cycles where the cash rate is now, it means that interest-only is a very viable option for many customers. A typical loan size is approximately $350,000. So a repayment amount is like -- the interest-only is approximately $200 per week. Now trying to split out some of the analysis in more granular detail on the next couple of slides. First, starting with home lending. And this is a predominantly an analytical exercise that we're augmenting, obviously, as we're in regular contact with our customers. And what we've provided here is a breakdown using one of our home loan risk scoring models, and it typically includes a number of the factors that you would ordinarily expect. So things like dynamic LVR, how far a customer is in advance on their repayment history, the industry sector that they work within, things like interest-only versus principal and interest, owner-occupier versus investor. We've also added in variables such as JobSeeker. You'll see that disclosure there on the slide of 13.6% of our accounts tagged to a JobSeeker payment, although 58% or 7.6% where the joint accounts with 1 party are receiving JobSeeker accounts -- JobSeeker payments. Now this is, of course, been possible because in about 90% of cases, we have an active transaction account associated with our home loan. So we feel like we've got an accurate read on what's happening in the customer's account and of course, changes to income, an important variable within that overall model. You'll see on the left-hand side, some disclosure there in terms of active accounts that are in deferral as at July. We've seen a continuing reduction throughout August, but a slight increase, obviously, as you would expect, through Victoria. But at least month-to-date in August, we expect that, that number is going to be flat or slightly down. We've provided dynamic LVR of less than 80%, 67% of the book, and that's an important variable. And of course, as I said, 14%, 12 months or more in advance. Similarly, from a business lending perspective, we've looked at a number of different variables, including the occupation sector, changes in and around cash flow, their behavioral repayment history. And you see an active breakdown on this slide, both between our states, where the geographical distribution is by sectors. And I think importantly, if you look at the home loan slide, there was 25% of our customers were making some form of repayment. In business lending, that skews even more to actually be 30% of customers that are on a repayment deferral at the moment are making their repayments in full. 89% of our customers are secured. So it's -- one way to think about it is 67% fully secured, let's say, 22% are partially secured, leaving 11% of unsecured. And just over 50% are relationship managed. And obviously, relationship managers play a very important role in terms of maintaining regular contact with customers, but also bring a depth of understanding about our business plans, inventory, supply chains in our broader overall assessment as we go through the reviews with our customers. As I said at the start, we've made good progress in consistently executing our strategy during the course of the year. We completed the divestment of -- we announced the divestment of 55% of our CFS business to KKR earlier this year, which we expect to complete in the second half of this financial year. We also announced as part of our results, the latest report from the Independent Expert, Promontory. We're making good progress completed -- having completed almost 80% of our milestones. You'll see overall very strong share performance, above system growth and clearly in deposits and home lending, stronger performance in business lending. And again, that improvement that we're seeing, not just in our Net Promoter Scores, but also more broadly in the context of the reputation and standing of the business going forward. And of course, those investments in digital banking and our technology more broadly, absolutely critical to our future strategy. We really want to position ourselves as the trusted and relevant partner at the center of our customers' financial lives. An essential part of that is being the #1 digital bank. We've been recognized in that way for the last 4 years by Forrester and 11 years by Canstar. And we've continued to invest in some leading features and functionality to improve the quality of the experience for our customers. Just a couple of recent examples. First of all, we rolled out in the last month or so our coronavirus money plan, which just provides some simple but actionable insights and steps for our customers to be thinking about. We've seen more than 300,000 customers use that already. Our bill prediction tool, which actually helps, of course, customers manage and expect what bills are coming through. We've seen almost 1 million customers use that -- start using that in just the last 3 weeks. And perhaps just to give an insight about how some of the unique elements of our technology come together. In building something like the bill prediction tool, we're using 14 billion transactions. We then calculate 150 million different bill presentment options. We're using 20 machine learning models, and we deliver that into a personalized experience, which, of course, continues to improve the experience that is personalized to our individual customers. We've made some very good progress in and around our payment innovation. That's a huge priority for us going forward, continuing to work very closely with Klarna. We had a technology and innovation update a couple of weeks ago. We will continue, and we look forward to bringing some more exciting innovations to market in the months ahead. At this point, I'm going to hand over to Alan, who's going to talk more about the result in more detail.

Thank you, Matt, and good morning. Financial year 2020 has certainly been one of our more interesting periods, and I will step through it in more detail shortly. In summary terms, what really stands out for me is that despite a difficult environment in both social health terms and economic terms, the structural advantages of our franchise, coupled with a disciplined execution of our strategic and operational priorities, has delivered a pretty good set of outcomes for our customers and our shareholders. Before the coronavirus pandemic, we were already experiencing the earnings pressure of a lower for longer interest rate environment. While that represents a headwind in absolute terms, in relative terms, the Commonwealth Bank performs better in a falling rate environment. Our structurally advantaged franchise product mix and our balance sheet settings, help us deliver less volatile earnings through the cycle and generate structurally higher levels of organic capital. After the onset of coronavirus and the associated economic downturn, customer behavior has changed in 2 ways, which also play to our franchise strengths: A scale advantage that attracts more customers to the Commonwealth Bank during uncertain times and an acceleration in the level of our customers' digital engagement. We have built upon those strengths with strong operational execution in the retail bank and better capital disciplines across the group. We have strengthened all of our balance sheet settings and then extended that balance sheet in support of our retail business and institutional customers across both Australia and New Zealand. That has resulted in strong growth in home loan market share, a large capital surplus, both before and after the dividend, strengthened levels of loan loss provisioning at 30 June and an exceptional period of customer deposit growth. Now on to the detail. And let me start off as usual with the reconciliation of total statutory profits to cash profits from continuing operations. Statutory profits for the year were $9.6 billion, largely due to one-off gains on the sale of the various wealth management businesses. All the usual adjustments apply with Colonial First State, now the main contributor to profits from discontinued operations. Those adjustments result in cash profits from continuing operations of $7.3 billion. And as Matt has described, that cash profit is 11% lower than last year. Operating income, operating expenses and operating performance are all up by around 1%. And so it was the loan impairment expense more than doubling to $2.5 billion which drove that reduction in cash profits. Looking firstly at operating income. The growth was driven by higher net interest income, more than offsetting the impact of COVID-19 on other banking income and lower fees in our funds management and insurance businesses. That growth in net interest income of $386 million was a function of strong volume growth across our core products, with average home loan balances up 4%, another strong period of double-digit transaction deposit growth and positive momentum in business lending. Institutional lending balances were 5% lower on average year-on-year. However, spot lending exposures increased slightly as the business continue to support key clients' liquidity needs during a difficult period. As you would expect, net interest margins were lower over the year. And if we look at the change over the sequential change over this half, margins fell by 7 basis points. Asset pricing provided a small benefit of 2 basis points. The margin pressure from a low rate environment can be seen in the 5 basis point reduction in deposit funding and pricing and a 3 basis point impact of lower earnings on invested capital. The other phenomenon that we're seeing right now is a very high level of excess liquidity, principally due to that strong growth in transaction and savings deposits. Those excess liquids are deployed in very low rate, high-quality liquid assets, diluting our headline margins by 4 basis points. As we look ahead, we expect the cash rate reductions will result in a 7 basis point margin headwind over the next financial year. It is also likely that we'll continue to carry excess liquids during a period of economic uncertainty. And so it's likely that, that will dilute headline margins, though that's a little harder to estimate at this point. Operating expenses grew by 0.7% over the year. That was helped by a reduction in customer remediation costs of $381 million despite the increase in aligned advice provisioning that we took in the second half of the year. If we exclude notable items, underlying costs grew 2.7%. Within that, we absorbed higher staff, property and IT costs, partly due to the impacts of coronavirus. We scaled up the operational resourcing of our customer financial assistance and collections teams. We understandably seen lower levels of annual leave taken. We made all our branches and commercial offices COVID-safe for our people and our customers. And we invested in IT infrastructure to enable 39,000 of our people to work from home. While this is the second successive year of cost growth since we announced our strategic priority of business simplification and cost reduction, it is pleasing to see growing momentum and productivity benefits. We've delivered $548 million of cumulative cost savings this year, an increase of $358 million on the prior year. And this will continue to be an important area of management focus, given the weaker earnings outlook. Turning to our balance sheet settings and looking firstly at credit risk. Loan loss rates increased significantly across both consumer and corporate portfolios due to forward-looking adjustments to provisions for the impact of COVID-19. We can already see some signs of emerging stress across the portfolio, although is early days. Within the consumer portfolio, both home loan and personal loan 90-day arrears remain below the levels that we've seen last year. However, both of these products are being insulated by the loan deferral arrangements that have been in place since March. Credit card 90-day arrears increased 43 basis points to 1.23%, although around half of that increase relates to the denominator effect of lower credit card balances. Troublesome and impaired assets increased $900 million to $8.7 billion, with most of that increase related to higher corporate troublesome exposures from a relatively small number of institutional clients in those sectors most exposed to the coronavirus lockdowns, including retail trade, manufacturing, transport and culture and recreation. We have been focused on supporting our retail and business customers during a difficult period. The loan deferrals, along with a very strong fiscal, prudential and monetary policy response, are providing individuals and businesses with much needed time to mount a recovery. However, we know that, unfortunately, not all of our customers will be able to fully recover. And we've, therefore, been conducting very granular modeling of the expected impacts across both our retail and nonretail portfolios. For our retail lending portfolios, we've conducted analysis of our customer base across a number of dimensions, including their occupation, where they live, their payment activity and for home lending, their level of equity. For our nonretail lending portfolios, we've looked at the expected change in cash flows for those businesses operating within impacted industries and geographies. And that's informed the degree of notching that we've applied to the probability of default and loss given default for those exposures as part of our forward-looking adjustments. And that approach has enabled us to continue to take a careful approach to our provisioning. And as a result, we have increased our collective provisions in the consumer portfolio by 32% and in the corporate portfolio by 48%. That takes our total provisions as a proportion of credit risk-weighted assets to 1.7%, the highest in the industry, along with the most highly collateralized lending portfolio. As we look ahead at the alternate economic scenarios, we're well positioned for whatever the future may hold. Our current level of provisioning is $1.1 billion higher than the level of provisions that we calculate would be required under our base case economic forecasts. That extra level of provisioning provides our earnings and capital levels with a degree of insulation should we experience a more severe prolonged downturn scenario. We continue to strengthen our funding settings. Our customer deposit ratio is now 74%, and the weighted average maturity of our long-term debt is now 5.3 years. We continue to reduce funding risk in other ways. For example, our reliance on short-term funding sources is now at historical lows. We also have access to $31 billion of 3-year funding from the RBA's term funding facility, and that provides us with another stable source of funding as we seek to support our customers and the economy during the difficult period ahead. On capital, we've delivered a level to Common Equity Tier 1 capital ratio of 11.6%, down 10 basis points since December 2019. That represents a significant surplus to APRA's unquestionably strong capital requirement and will be further strengthened by the expected capital uplift as we finalize our announced divestments. During the 6-month period, we absorbed the $1.5 billion increase in COVID-19 loan loss provisioning and $3.5 billion in cash paid and neutralized interim dividends. That was offset by another strong period of underlying organic capital generation and 26 basis points of inorganic capital from completed divestments. Importantly, our level 1 parent entity capital remains significantly higher than our level 2 group capital, which means we're uniquely well placed to absorb RBNZ's freeze on dividend payments from New Zealand banking subsidiaries. Looking at the trajectory in our capital levels over the course of the past year. You can see that we remained above unquestionably strong capital levels for all 12 months, including the months following the declaration and payment of our last 2 dividends. As you would expect, there's been a degree of volatility in our capital levels over the course of the past year, in particular, over the last 2 quarters. In Q3, we've seen weaker profits from the COVID-19 provisions and the timing of the interim dividend. We've also seen higher credit spreads and market volatility in the month of March, and that resulted in a 95 basis point fall in Q3 CET1. In Q4, we've seen stronger profits and a tightening of credit spreads. We also adopted a more granular calculation of credit risk-weighted assets on defaulted exposures, providing a 9 basis point improvement to CET1. These benefits offset the deterioration in credit quality and delivered an 85 basis point increase in Q4 CET1. The final dividend of $0.98 reflects APRA's recently updated guidance and sees us retain more than half of our second half statutory earnings. That represents a cautious approach to capital management and dividends as we head into a period of economic uncertainty. I'll now hand back to Matt for the outlook and the closing summary.

Thank you. Thanks very much, Alan. Just turning to the economic outlook. And clearly, there's considerable economic uncertainty in the periods ahead. As we've thought about it, we've obviously tried to prepare for a range of different economic scenarios. The way we see Australia and New Zealand, certainly, on a global basis, to be extremely well positioned at both a health outcome perspective as well as economic, notwithstanding the setbacks in both Victoria and New Zealand in the last 24 hours. We enter this period in a period of significant fiscal and economic strength. We have a strong tailwind from mining exports. There's been a clear recovery in the agriculture sector. There's a very strong pipeline of infrastructure projects in place at both the federal and state level. And of course, we've seen very closely and work constructively with all arms of of government and with our regulators to make sure there's substantial support in place from not just the financial system, but, of course, very effective income support from the federal government. As we look forward, we based our central scenario on the Reserve Bank forecast, which came out in May. We've reviewed their more recent forecasts. They're very closely aligned. We've got unemployment at 9%. I think they've got it at 10% at the end of the calendar year. I think that's really going to depend on the participation rate. Clearly, there's some degree of understatement in both of those numbers just given the impacts on the broader economy. We've got the economy contracting at about 4% this year before recovering by 2% next year. But we feel that the organization is very well positioned to navigate through a range of those different scenarios. And clearly, there will be a lot of uncertainty and a number of different factors that are going to drive the economy. In the near term, in terms of the ongoing suppression of the virus, a clear impact on business and consumer confidence, which we have seen contract. And more broadly, as we see a tapering appropriately of some of that income support, there's going to be a lot of stimulus required to generate aggregate demand and future employment to try to bring that unemployment rate down from close to 10% over the next couple of years. And notwithstanding, of course, more broadly will be dependent on what sort of progress is made in around vaccines, various treatment, how effectively at an individual community and state level the virus can be suppressed. And of course, as I said, the flow-through of impact on to business and consumer confidence. In summary, as I said at the outset, we've worked very hard and quickly to try and put substantial support in place for our customers and for our communities. We've seen strong improvements across a range of different metrics from our Net Promoter Scores to our reputation more broadly, also right through into our employee engagement. We've consistently focused on executing our strategy and continuing to execute our core business performance very well. We've seen very strong performance in a number of our markets like deposits, above-system home lending growth. We feel the balance sheet is in very strong condition. Big improvements in our deposit funding. We feel very well capitalized with a pipeline of inorganic capital still to come, which ultimately, I think, positions the Commonwealth Bank very well for a range of different economic scenarios. And on that point, we'll hand over to Mel for Q&A, and Alan, and I will be happy to take your questions.

Thank you, Matt. For this briefing, we will be taking questions from analysts and investors. We'll be taking them from the phone lines. [Operator Instructions] We'll start the questions with a question from Richard Wiles at Morgan Stanley. Thank you, Richard.

So I have a question on troublesome exposures. Slide 105 includes troublesome exposures by industry. Can you explain why the ratio fell in accommodation, cafés and restaurants? That hardly seems credible given what's happened over the past few months. And could you also explain why troublesome exposures are down in the property industry and also in the construction industry? And then I have a second question on expenses, which I'll proceed to in a moment.

Yes. I mean, as I mentioned in the presentation, Richard, what we've really seen in troublesome exposures this year is really movements in institutional client exposures, as you tend to see in the early part of a stress. Now I called out some of the areas where we'd seen a significant net increase in our corporate troublesome exposures and particularly impacted industries. Obviously, some of those industries are more overweight institutional clients relative to some of the other industries, including accommodation, cafés and restaurants, which is more heavily weighted towards the business bank. So you're going to see a little bit of noise in TIAs in the early part of the stress in one direction because you're going to see the emergence of stress within single institutional clients more quickly. And then as you roll through later periods of the stress, that will emerge in individual business season. So you've seen a little bit of noise in the movement of the TIAs based on single exposures, moving in and out of troublesome and also the weighting between institutional and business exposures across these various categories.

Yes, Richard. I mean the only thing I'd add to that is, I mean, really, the process that we've been going through over the last few months and is going through at an individual and risk base across each of those different categories and completing in-depth review. So if you think about an institutional bank where, clearly, there's a smaller number of exposures, they'd be close to 100% of the way through their client base, and across the business bank can be in the order of between 70% and 80%, depending on the sector. So you mentioned accommodation, cafés restaurants. We've been through 80% of the values by exposure. Actually, 50% of them have had some form of downgrade. I think commercial property, you mentioned. I think we've reviewed 100% of the exposures in the institutional bank, 90% of the exposures in the business bank. So I think to Alan's point, there is just some noise in terms of the movement in and out. But we do feel like there's been very thorough sort of coverage and reviews and particularly, it's easier, obviously, to see the impact and movements around probability of default in particular. And so there has been some considerable downgrades. And of course, some of the notching that goes into the calculation of the forward-looking adjustment.

Okay. And just a question on expenses, if I could. Alan, you acknowledged that in the last couple of years, your costs have gone up despite saying at the first half '20 result -- first half '19 result, 18 months ago, that you're aiming for absolute cost reduction. Do you think you can achieve absolute cost reduction in full year '21? The cost savings are going up, but that's not leading to a reduction in the cost base. So I'm just wondering how serious you are about reducing the absolute cost base in an environment where you've acknowledged the revenue pressure is increasing.

Yes. Look, Richard, maybe I'll start and then throw over to Alan. Certainly, we are serious about it. When we -- as you said, at that point in February '19, we sort of said 2 things: Absolute cost reduction; we also talked about a 40% cost-to-income ratio. I think we've had 5 cash rate reductions since then, which has obviously made the latter more challenging. We recognize or we believe we're making progress. And as you mentioned, in terms of the benefits in each period, there's clearly more work still to do. I mean, full year at 0.7%, sequentially 0.4%. I think if not for the increase in COVID-related cost, which again, is an excuse, it's just an explanation, we would have got close to 0 cost growth in that period. I think on the other side, I think we've been clear from the beginning, we want to make sure that we deliver that performance, but we don't want to sacrifice the franchise or the broader, more value-creating options. I mean in that context, we've added about 500, 700 people into our Financial Assistance Solutions team. We've clearly increased a number of operational roles. But you're quite right. As we've thought about the business plan this year, without giving any specific guidance, we recognize it's going to be a challenging income environment. And therefore, our improvement and our simplification and cost reduction needs to step up.

Great. We'll take the next question from Jon Mott at UBS.

A question, this relates more to Slides 14 and 15. I'm going through these, which is more the deferrals. You gave us some good information on the distribution by risk score, but it's on the number of deferred accounts on the y axis. If you reproduce that on the dollar value because, obviously, you're going to have a large number of very low outstanding balance, which is going to skew this to the more positive side, is it possible to reproduce it or give us even the scores beneath the table based on the dollar value outstanding rather than the deferred? So that's probably a comment or request. And then also similar to that, you give us the -- in the profile, the number of customers on JobSeeker. Have you also got the number of people on JobKeeper who may potentially be unemployed at some stage given that those are going to come through?

Yes. Sure, Jon. So on 14 is for home lending we did. It's in accounts, and the distribution doesn't change very much for balances. There's more of a SKU, which is why we've shifted on business lending to balances because there's a high number of smaller exposures. There's not a big distribution in the context of the loan size on home lending. To your second question, around JobKeeper, yes, absolutely. We looked at it both in the context of personal as well as business. You'll see on Slide 15, we mention approximately 30% receiving JobKeeper at a business level. That's easier for us to recognize because we can see the depositor details. When we look through our personal accounts, because of the nature of the way the JobKeeper is distributed actually goes to the employer, which then distributes it to the employee, we tried to band an algorithm. So we basically looking for multiples of $1,500, but employers also top them up. So we steered away from providing that disclosure because we felt -- well, we know that we're understating it. So we don't have a sufficiently robust estimate to include on the slide, but in the context of the overall modeling, it was certainly one of the things that we were looking to do. And if we felt that we could do it accurately, we would provide it.

And just a follow-on question from that. Do you have a feel for the percentage of the deferred loans, which is going to need further extension or movement to interest-only at the end of the 6 months to qualify for the additional 4 months?

Yes. Look, there's a couple of different data points. I mean, certainly, in the way that we've approached as we have here is an analytical exercise, which was then augmented through practical experience with our customers, we certainly believe the majority and are positioned to exit their repayment deferral. That's also consistent in terms of where we've had -- ask customers and ask them for their intentions. Obviously, we recognize that intentions can change over time. And so then we're kind of working through operationally over the next 2 months. We're going to contact, obviously, the entire customer base. We're going to leverage a number of different channels. But we've got approximately 250,000 calls to make or receive because it's multiple contacts. We're using our email, our app, our asynchronous chat as part of that as well. So we've got a number of different options that we, of course, are going to try and tailor to individual circumstances. So we have a hypothesis, but clearly, that's also going to be impacted in terms of events even in the next couple of months and how effectively the virus is suppressed in other states. And I dare say how quickly recover -- Victoria recovers.

We'll take the next call from Victor German at Macquarie.

Two questions for me, if possible. One on deposit margins and one on the payments. So on deposits, I think both Alan and Matt, you talked about really strong growth as you're seeing in transaction accounts, which has been happening for around a couple of halves. I'm just -- when I look at your Slide 23, it's not obvious on that waterfall chart where the benefit of that shift towards cheaper transaction deposit is coming from. If you maybe perhaps can talk to us whether it's sitting in that deposit and pricing funding part of the bucket or where else it's sitting in sort of the quantum that that's providing versus the impact of lower rates on your transaction saving accounts.

Sure. Sure, Victor. So you'll see that benefit in the portfolio mix bar. So that portfolio mix really has the sort of substitution effect, if you like, of lower-yielding customer deposits relative to other forms of funding. Now in the period, there's a couple of things going on in that portfolio mix bar as well as the change in the average funding ratio. So one, you need to look at the average change in the deposit ratio. So in the second half of the financial year, well, our spot deposit ratio was 74%. Obviously, we've seen a lot of growth in the final quarter. So the average funding ratio is about 71.5% in 2H '20. That plays about 70.5% in the prior half. So you've got that delta driving about 2 basis points of benefit in the sequential half. Going the other way, you will have seen that we had a reduction in consumer finance balances which are obviously very high-margin relative to other forms of lending. So you've got a negative portfolio mix effect of 1 basis point there. And so that's why you come back to the 1 point of portfolio mix for the sequential half. But within that, you can see that the margin benefit from that very strong growth in at-call transactions and savings accounts.

So would it be fair for me to assume that when you disclose the transaction saving cumulative impacts of 8 basis points in the half, is that pretty much all impact of lower rates on those transactions having count before you get the benefit of replicating portfolio? Is that the right way to look at it?

Yes. So we've split that out in the call out box, so you can see the 8 points cross transaction and savings, and then there's an offset of 2 basis points from the replicating portfolio.

And then second question, just on provisioning. I sort of feel like there's a little bit of a kind of disconnect in the way banks are thinking about this versus investors. And I mean if I look at your -- to chart on Slide 27, where you look at your central downturn scenario versus recognized impairments, it kind of almost implies that if your central downturn scenario plays out, you will have that write-backs in 2021. I'm guessing that, that's not the message that you are sending. And there's obviously lots of moving parts, but I'm assuming that as we go through 2021, you will have actual write-offs and also the level of provisioning is likely to increase as the credit quality deteriorates. Can you maybe just talk to us about sort of some of the moving parts as we move into -- throughout 2021, within your central downturn scenario, how the write-offs and provisioning is likely to play out?

Yes. I mean we're going to continue to evolve the central scenarios, the other scenarios, the severe downturn scenario, I mean we've seen, for example, the updated RBA baseline forecasts on Friday in the Statement on Monetary Policy. And so we had another look at that central scenario against those metrics that materially change that $5.3 billion central estimate. So we still feel comfortable with the additional level of provisioning that we're carrying. Look, I think we've had a track record over many years, Victor, of holding what we would consider to be -- been very careful around our provisioning. I mean you've seen that when we transitioned to the new accounting standard a couple of years ago. We took a top-up in provisions at that point. I think at that time, we would have been provisioned 200% of our downside scenario. That was before, obviously, the events of the past 6 months. We've obviously adjusted all of those scenarios to the right. And again, we're comfortable their level of provisioning is appropriate in the context of the uncertainty that we've got. Yes, you'll see as we start to see signs of the stress emerge across, in particular, retail and business sectors, you'll see increases in the level of write-offs. We will continue to revisit the level of collective provisioning that we hold as we start to see that transfer from collective to individual assessed provisions. We feel comfortable where we are today. We're going to continue to monitor the evolving situation. And I think based on our track record, it's safe to assume that we're going to carry conservative levels of loan impairment provisions.

We'll take the next question from Brian Johnson at Jefferies.

Thank you very much for the disclosures. A few questions. Just on Slide 38. The new binding constraint on dividends, at least for this year, isn't cash earnings, it's basically statutory earnings. I was just wondering, could you give us a feeling on the P&L gains and losses on the sale of Colonial First State, CommInsure Life and BoCommLife when they come through? And then I had a second question, if I may.

So the -- you want the forward view of the…

Statutory profit. Yes. I mean, BJ, we've disclosed, obviously, the capital, but you're wanting to know what the forecast would be on realized gains through those divestments to the effect it's going to impact statutory profit in case that's the binding constraint for FY '21 to dividends. I mean…

Because, Matt, when you think about it, this result was this result, but what helped your ability to pay the dividend was the net statutory gains down below the line. So we really -- when we're thinking about dividends, we've got to think about statutory profits, not capital, not basically cash earnings. It really does come down to the distortion from these statutory items. So I was just wondering if we could get that.

I think that's a really fair observation, Brian. I mean as we -- we obviously put ASX announcements upon completion of major announced divestments. I think in the past, we've historically focused, given the bank constrain historically has been capital levels on the CET1 accretion related to those divestments. But I think you make a very good point. And to the extent that we weren't already going to do that, we'll ensure that the noncash statutory P&L is included as we complete. Now obviously, we can't preannounce those statutory profit impacts until we reach completion because there's all sorts of completion account adjustments and considerations that go into that calculation. But to ensure that the market is well informed about our noncash gains, we will ensure that as we complete, we'll provide those details to the market.

Well, then as a subset of that question, may I ask then, does that imply that absent more gains going forward, the dividend capacity would actually go down in the next half?

Well, BJ, I mean I think there's a couple of difficulties of that question. One, the APRA guidance, at least it's been made clear, applies for this calendar year. Now of course, there may well be new guidance in '21, which would apply then to our interim dividend. So I think that's going to -- it's going to depend a little bit on -- it's a number of factors, notwithstanding the overall economic outlook and whether APRA feels that it's necessary to provide ongoing guidance and then the consistency of that guidance the second time around. But we'll certainly take away. I mean I couldn't give you the forward-looking estimates on the spot. But understand, given the calculations in the way the market will be thinking about, we'll certainly think about how to best disclose that.

And it's worth just bearing in mind, Brian, on the second half cash earnings. Obviously, that second half, we absorbed both the $1.5 billion top-up in the COVID-19 loan loss provisions, and we've also seen north of $400 million of other notable items on customer remediation programs. And most notably, that aligned advice provisioning that we took in the second half. So those -- the second half cash earnings did have some significant items in them as well.

Okay. The second one, if I may. Just on Slide 23, where you're talking about the cash rate correct, the 7 basis point NIM headwind in FY '21. If you think about where we are, we've got a cash rate of 25 basis points that the RBA has said is the effective lower bound. We've got so much liquidity slopping around the system that we've probably got a 10 to 12 basis point, 90-day bank bill rates. So very good basis risk, but that's probably less important. We've got a 3-year rate of 25 basis points. But then when you look at the 5- and the 10-year -- 10-year bonds haven't really moved the [indiscernible] since February. Can we just get a feel on what would happen to this interest rate sensitivity if the RBA was the cash rate to 10 basis points? And then alternatively, if the RBA was to start buying 5- and 10-year bonds to flatten the long end of the yield curve, down to 25 basis points.

Yes. I mean maybe there's a couple of ways we can look at that. I mean, at the moment, the effective cash rate is actually around 10 to 15 basis points, as you say. So we're really seeing the effect of that lower actual cash rate, given the very unusual levels of excess liquidity in the system. So we're seeing that right now. On the yield curve control out beyond 3 years. I think, as you've rightly pointed out, Brian, our replicating portfolio on our deposit hedge is on a 5-year tractor, so we are sensitive to the movements in that 5-year yield. Certainly around 40 points at the moment. So you could do a price simple sensitivity on that. Every 10 basis points is going to be over the 5-year period, around $70 billion, on a $70 billion deposit hedge, but you'd see that manifest over the course of the 5-year tractor rolling off. So a relatively modest effect in year. But yes, we'll continue to look at how both -- I mean we label this cash rate headwinds, but obviously, it's sensitive to swap rates as well. That cash and reference to cash rates were simplifying use of language, but we'll continue to monitor what swap rates do, what the cash rate does. And I think it's helpful to provide that guidance around the impact, given the number of moving parts on our net interest margin over the next financial year.

Maybe the only thing I'd add to both your question, BJ, and a little bit to Victor's. It's a combination of much higher level of fixed rates and the reduction in TD is actually our cash basis exposure has gone from $150 billion, sort of another, I think, $25 billion down. So I think in the past, we've basically said for every 5 basis points improvement in that cash build spread, it's a 1 basis point group NIM. It's now at sort of 6, so we've seen quite a material reduction in that just given the shift in customer behavior, particularly moving to fixed rates and home lending.

We'll take the next question from Matthew Wilson at Evans & Partners.

Two questions, if I may. Firstly, what is the balance of capitalized interest income on the deferred loans?

So the balance of -- in the period since deferral, we've got some disclosure in our annual report in that regard. But the -- for retail loans, we accrued $310 million of interest over the period of deferral. Obviously, we've received payment on 25% of the retail deferrals of that number. On business lending, we accrued interest of $150 million over the deferral period. And again, as we've disclosed, we've received payment for 30% of the loans in deferral.

I think it's on about Page 150 or so, isn't it, in the annual report?

That's right.

Yes. And then secondly, just with deferrals again. When I line up your disclosure on Slide 13 with the letters that you've sent to the House of Representatives Standing Committee on Economics, they don't actually line up. And indeed, if you use the letters, your bar chart would go up, not down. But more importantly, what is the percentage of deferrals that have an LVR greater than 70%? And given that 75% of your mortgage deferrals haven't made a payment, mortgage deferrals and business deferrals where you don't collect interest is very unusual practice. Do you think this is a policy error? And then normally, in these circumstances, you would migrate to interest-only, which is what you've done in New Zealand.

Yes. So a couple of things, Matt. I think the House of Reps, I think the latest update was June. I have to check. I'm confident this disclosure is both more current because we've gone out, obviously, into July. So it certainly should be the basis, but I'm sure we'll reconcile in that context. I guess to your last point, look, I mean, deferrals, I think they have provided, obviously, significant support and flexibility for customers. Clearly, the test is going to be how effectively we can make the orderly transition away from repayment deferrals. I think from our perspective, making sure that we're maintaining regular contact with customers is clearly critical. I mean I think our experience and certainly what I've seen internationally, that sort of repayment frequency is particularly sensitive and unsecured. And so I think from a personal lending perspective, it's a much shorter deferral period as an example. So that was a 2-month, and we saw 95% of customers transition off that. I'm probably less worried about, but I acknowledge it's a risk, around people losing that repayment frequency, particularly in and around housing. And as I said, the business lending book is 89% secured. I think we've provided the disclosure, obviously, in terms of the proportion. I think the average dynamic LVR is 69%. And then there's variances across the geographical distribution. And so without rattling all of them off, consistent if you looked at the disclosure around where negative equity is, it sort skews to Western Australia. Western Australia have the highest dynamic LVR. Arguably, you'd say maybe that market's got less to fall. Interestingly, I think Victoria has got the lowest dynamic LVR of the repayment deferrals. I believe it's 62%. I think New South Wales probably 64%. So I couldn't give you exactly the split that you were asking because I think you wanted the percentage that were above 75%. I don't have that number off the top of my head. But it's an important variable that we watch closely and it's a key variable in the context of where the risk is, that combination of income, how far ahead customers might be on their repayments in total as well as where their dynamic LVR is.

We'll now take the next question from Andrew Triggs at JPMorgan.

Look, first question just on deposits again and the NIM. Just trying to hear your thoughts on what you're seeing in the deposit market. We've observed quite a significant improvement in -- or reduction in term deposit rates, particularly late in the half and post balance date. And just as a follow-up to Victor's question on that switching dynamic. Do you think this will continue at the current pace? Or as TD rates and online savings rates seem to be compressing, perhaps the tailwind will start to lessen in future periods?

Yes. I maybe I'll start, and Alan, you add. I think it's a combination of things. As rates are coming down, there's probably just less sensitivity across different products switching more broadly. We've certainly seen a reduction in our term deposit balances. We're seeing rates coming down across the industry. That mix effect does -- provides us a benefit clearly and very strong growth in and around transaction and household deposits, which, obviously, is a key part of our strategy and oriented very much in the terms of the way we want to serve our customers. And so we certainly want to continue investing in digital, et cetera, to help promoting that. But I think unfortunately, from a customer perspective, the term deposit rates have come down to really reflect the lower interest rate environment that we're all operating within.

Yes. I mean I think the trend that you mentioned, the switching trend, is certainly a phenomenon we've seen in other markets that have got lower for longer interest rates. So I think certainly, we are seeing that. Now we obviously had a very unusual amount of deposit growth in this period. I mean, we went back and looked at whether there's been another period, certainly not in dollar terms, but even in proportionate terms, where we would have seen that size of growth, 25% growth in transaction deposits. And even following the GFC, we didn't see growth of that shape and size. So that's -- obviously, that flow was very high in the last 6 months. We wouldn't expect to continue at those levels, but we've had many years of double-digit growth in transaction deposits. It's a very good grounds of competition for us given the digital assets that we have and the very engaged, very high levels of digital engagement across our customer base, which has been, I think, accelerated through the issues that we've seen over the past 6 months. So I think it's a trend that's here to stay. I think the volumes, we'll see them moderate a little off the highs that we've seen over the past few months.

Can I just follow up on the cost side of the equation? Just the expectations for the profile and the runoff or the reduction in spend on risk and compliance programs, please? Is that something that can be achieved in -- or partly achieved in FY '21?

Yes. Look, I mean as we've disclosed, I think we're at 72% total investment spend. We expect that's going to come down in '21. We're absolutely committed to continuing the investment and making sure that we're in a very strong position to manage financial and of course, nonfinancial risk. We've made very good progress against the remedial action plan that was set in place. But we do feel that we've -- we're in a position now to start increasing more of that investment towards productivity, growth and innovation. That's certainly something we'd like to deliver in the year ahead.

That's also -- I mean, we've talked about before, those multiyear programs of work that we're conducting, which you see in the risk compliance and other programs item. There's still -- I don't think we'll be through all those programs of work during the course of the next financial year. So there will be a -- there's been an element of stickiness to that line item and over -- certainly over the year ahead.

Great. And we'll have to be taking our final question now, and we'll be taking it from Brendan Sproules from Citi.

I just had a question on the capital intensity of your business. Obviously, Slide 26, you show some deterioration particularly in your nonretail portfolios, but you've also seen some deterioration in your credit card portfolio. When are we going to start to see that emerge in the average risk weights? It does seem the average risk weights haven't really materially moved this period. You've obviously refined your estimates, but maybe you can give us some indication of the timing of when you expect to see those average risk weights moving higher.

Yes. I mean we've obviously put the central scenario in there, which has got the expected increase in average risk weights, which we've got in the back of the slides. That's the updated estimates relative to those that we put out to the market in Q3. So I'm just trying to find that slide. So the -- those risk weights, we think, will trend higher. I mean one of the interesting things you've seen in the last half, and I called it out specifically because it does hit a few of the line items within the Pillar 3 subcategories of our exposure, is through that granular allocation of collective provisions to stage 3 loans, which are nevertheless well secured. We hold CP against those rather than individually assessed provisions. And so that's allowed us to have a more accurate calculation of credit risk-weighted assets across a number of retail and nonretail categories. So that's provided a degree of offset to the migration in average risk weights that you would otherwise have seen. But yes, we'd expect some migration in risk weights, obviously, in the next 12 months.

And just a question on funding, just on Slide 116, is you've got another $21 billion (sic) [ $31 billion ] of wholesale funding coming due in the next 12 months. Could you tell us how much you've issued in the last 6 months? And I guess your expectations going forward for needing to actually renew that given the strong growth in deposits that you have collected over the period and the buildup in liquid assets.

Yes, we've done very little long-term funding over the course of the past 6 months. We did draw down $1.5 billion on the RBA's term funding facility. I think prior to March, we did around $1.5 billion, $2 billion of new long-term issuance. But really, what you're seeing for the full year '20 is mostly long-term funding issuance that took place in the first 6 months of the financial year. And as you say, given that very strong growth in transaction deposits, the -- I mean we'd like to lend the funding that we have. The -- obviously, we're seeing that deployed to that additional funding in excess liquidity at the moment. And so we would have a relatively low appetite for new long-term debt issuance in the context of RBA's term funding facility and very strong levels of deposit growth.

Great. Thank you, Brendan. That now brings us to the conclusion of the briefing. Thank you very much for joining us today. And if you have any follow-ups, please come back to us. Thank you very much.